Money Habits That Are Leaving You Broke
Adapted from an article by Tom Corley
One of the most common New Year's resolutions is to improve one's finances. In fact, a study found that 25 percent of people made a resolution to spend less and save more.
Chances are you should be saving more and spending less, take a hard look at some of the not-so-good money habits you may have developed over the years.
These ingrained reactions and mindsets chart a course for success in every aspect of life. Make this the year you cut your broke habits and cultivate wealthy new ones.
Broke Habit 1: You spend too much on housing.
Housing costs, of course, start with rent or a mortgage but also may include property taxes, utilities, insurance, repairs and maintenance. Housing costs normally constitute the largest component of your spending, so it's imperative to keep them as low as possible.
So how can you reduce housing costs? The solution is to downsize, find less expensive housing or share housing with family members or friends.
Bringing your housing costs closer to that magic 25 percent target means you will be able to save. IControl of housing costs has to be your No. 1 financial priority if you want to prosper.
Broke Habit 2: You spend too much on cars.
Like housing costs, spending on cars can eat up far too much monthly net income. New cars lose value as soon as they roll off the lot. So the smart strategy is to buy high-quality used vehicles and drive them until the wheels fall off. That's what 94 percent of the self-made millionaires in my study did. It's a good money habit.
Broke Habit 3:You develop habits by association.
We pick up almost all of our habits from those in our environment: parents, teachers, family, friends, co-workers, neighbours, mentors, celebrities, coaches, etc. When it comes to money habits, this could be positive or negative. If you want to adopt good money habits, associate with individuals who possess positive habits and pull back from those who don't.
Broke Habit 4: You spend on a whim.
Spontaneous spending is driven by emotions and a lack of self-control. Stores capitalize on this self-control weakness. They have marketing experts who set up product placements in checkout lines to exploit the likelihood of impulse purchases.
When you are tuned into this marketing ploy, you'll find it easier to stick to your list. That leads to a feeling of control over your spending.
Broke Habit 5: You overspend on entertainment.
Spend no more than 10 percent of your monthly net income on entertainment. Most who struggle financially spend far more than 10 percent on entertainment. Plan on living a long, financially secure life and reduce your entertainment spending today.
Broke Habit 6: You don't save.
Self-made millionaires make a habit of saving. The more you can save at an early age, the more wealth you'll accumulate. Ninety-four percent of the self-made millionaires in my study developed the habit of saving 20 percent of their income during their pre-millionaire years.
During my research, I uncovered a unique savings process used by millionaires; I call it the Bucket System Savings Strategy. Here's how you can use it:
First: Allocate savings into four buckets.
Bucket 1: Retirement savings. This includes individual retirement accounts, and other retirement plans or retirement-specific products such as annuities.
Bucket 2: Specific expenses. This includes a separate checking account, savings account, money market account or education savings account for major future expenses such as education costs for you or a child, wedding costs, expenses associated with the birth of a child, home down payment, and so on.
Bucket 3: Unexpected expenses. This includes a separate checking account, savings account or money market account for expenses such as wedding gifts, medical costs, sudden loss of income (unemployment, medical issues or the birth of a child), major repairs.
Bucket 4: Cyclical expenses. This includes a separate checking account, savings account or money market account for birthday gifts, holiday expenses, vacation costs, back-to-school costs, etc.
Second: Establish savings goals.
To make this bucket system work, you need to establish the overall amount of savings you will set aside each pay period. For example, let's say you decide to save 20 percent of your net paycheck. You would then want to allocate this 20 percent into each bucket as follows:
10 percent (half of your overall savings) into Bucket 1 (retirement).
4 percent (20 percent of your overall savings) into Bucket 2 (specific expenses).
3 percent (15 percent of overall savings) into Bucket 3 (unexpected expenses).
3 percent into Bucket 4 (cyclical expenses).
Third and last: Automate the savings process.
This is where the rubber meets the road: implementation. If you want to be financially independent one day, you must make living below your means a habit. One way to do that is to force yourself to live within 80 to 90 percent of your monthly net income by automating the savings process.
If you can't set aside 10 to 20 percent of your monthly net pay, set aside something, even just 5 percent. The key is to get into the habit of saving. You can increase your savings down the road as your income rises.
Broke Habit 7: You don't track your spending.
If you're not tracking what you spend, you'll never know you can purchase something for less money. A good example of this is insurance. Insurance costs often change up or down over time. Make sure you pay the lowest insurance rates for homeowners, auto and life insurance.
Broke Habit 8: You don't bargain-shop.
Make bargain-hunting a habit. Some of the wealthiest individuals in my study shopped at Goodwill stores. Looking for the best deals, clipping coupons, seeing movies during the early discount showings and shopping around for the lowest price will add up. Put the cost difference into your savings account.
Accumulating wealth is a simple process. You need to spend less than you make and save the difference. Over time your savings will grow and generate interest income, dividend income and capital gains.
It can be tough to break deeply ingrained money habits, but it is the key to financial independence. After all, the last thing somebody wants is to ask family members or friends for money. So develop good money habits that will put you in control of your life. It's empowering.
Make 2017 the year you begin to manage your money like a wealthy person does. Pretty soon you will be a wealthy person.
Adapted from 10 Money Habits That Are Leaving You Broke -an article by Tom Corley
Keep on keeping on! »
Jackie Appiah »